Monday, May 12, 2014

The Sticky Wages of Sin

"Only now can one fully understand the effrontery of these apologists." -- Karl Marx, Capital. 
"Under capitalism, man exploits man. Under communism, it is just the reverse." -- Polish joke (cited by J. K. Galbraith in Journey to Poland and Yugoslavia, 1958).
David Spencer (2002) and Aaron Pacitti (2011) have each observed similarities between the efficiency wage explanation for equilibrium unemployment (Shapiro and Stiglitz, 1984) and Marx's theory of the reserve industrial army. "In a sense," writes Spencer, "the debate has come full circle. Marx’s reserve army of labour, it seems, is alive and well and still operates to discipline resistant workers."

"Efficiency wage models arrive at the same conclusion," Pacitti argues, "but for reasons altogether different than those suggested by Marx." Because the efficiency wage model indicates an inverse relationship between the unemployment rate and the wage premium needed to discourage shirking, the hypothesis, "strengthens Marx's conclusion that unemployment will lead to lower wages, albeit through a different channel."

Both Spencer and Pacitti are critical of the efficiency wage hypothesis, as are Dean Baker and Mark Weisbrot (1994) and Warren Samuels (1994). Robert LaJeunesse (2004) cites Samuels's criticism of the asymmetrical treatment of shirking by the neoclassical mainstream and elaborates on Veblen's more balanced analysis of sabotage by both management and labor.

Spencer mentions in a footnote the incongruity of earlier economists viewing low wages as a necessary spur to work effort "to combat the labourer’s high demand for leisure and to maintain labour discipline." He also mentions in passing that "workers may deliberately slow down the pace of their work as a defensive reaction against the threat of unemployment."

Spencer neglected to mention, however, that indignation at such "restriction of output" by workers was a perennial motif of businessmen, economists and editorialists in their exasperated denunciations of a supposed lump-of-labor fallacy.

These accusations were the context for Elizabeth Gurley Flynn's I. W. W. pamphlet, Sabotage, that served as an inspiration for Veblen's (1921) discussion of the "conscientious withdrawal of efficiency" by business. "Sabotage..." wrote Flynn, "is a very old thing, called by the Scotch 'ca canny.' All intelligent workers have tried it at some time or other when they have been compelled to work too hard and too long."

In The Economics of Unemployment, John Hobson (1922) gave an unorthodox, even-handed account of the symmetry of workers' and the employers' versions of ca'canny:
Behind all these changes and chances of industrial life there lurks the abiding shadow of an unemployment due to the normal over-supply of labour-power beyond the current requirements of the market. Workers observe that, if this full supply is brought into effective use, it leads in a short time to a congestion of the markets, a fall of prices, a stoppage and a long period of under-employment. If, therefore, at any ordinary time the workers in employment were to give out their full productive energy, they would only expedite this process of congestion and depression. This, I think, is the underlying economics of 'ca' canny.'
If this labour-economics stood alone, it might be dismissed as shortsighted partisanship. But put by its side the corresponding doctrine and practice of employers, embodied in the economics of trusts and combinations. What is the directly impelling motive for the formation of most of these capitalist combines? The avoidance of 'cut-throat competition.' And what else is this than a recognition of a tendency of unregulated capitalism in an industry to produce goods faster than the market can and does expand to receive them, at a price adequate to cover costs of production? In other words, combination for restriction of output is the capitalist alternative to over-production, congestion and stoppage.
Orthodox economic theory has thus come full circle, from viewing low wages as a prod to work effort and shirking as a misguided response by workers to the threat of unemployment to theorizing high wages as an incentive for work effort and unemployment as an employers' disciplinary device to discourage shirking. One element has remained constant, though: it is the workers who are presumed to sin against productivity.

Dean Baker and Mark Weisbrot (1994) "The Logic of Contested Exchange." Journal of Economic Issues, 28, pp. 1091–1114.

Elizabeth Gurley Flynn (1916) Sabotage. I. W. W.

John A. Hobson (1922) The Economics of Unemployment.

Robert M. Lajeunesse (2004)"Keeping Labor Productive: Veblen's notion of reserve capacity and procyclical productivity analysis." Journal of Economic Issues, 38:3, pp. 611-627.

Aaron Pacitti (2011) "Efficiency Wages, Unemployment, and Labor Discipline." Journal of Business & Economics Research, 9:3, pp. 1-10.

Warren J. Samuels (1994) "On 'Shirking' and 'Business Sabotage': A Note." Journal of Economic Issues, 28:4, pp. 1249-1255.

Carl Shapiro and Joseph E. Stiglitz (1984) "Equilibrium Unemployment as a Worker Discipline Device." The American Economic Review, 74:3, pp. 433-444.

David A. Spencer (2002) "Shirking the Issue? Efficiency wages, work discipline and full employment." Review of Political Economy, 14:3, 313-327.

Thorsten Veblen (1921) The Engineers and the Price System.


Peter Dorman said...

The link between Marx and what later became efficiency wage theory was made clear in Herb Gintis' 1976 piece in the RRPE "The Nature of Labor Exchange and the Theory of Capitalist Production". He formalized his approach in a paper he coauthored with Tsuneo Ishikawa that was circulating in manuscript at about the same time as Shapiro and Stiglitz. His model wasn't as stripped down and elegant, however, and few people read it.

I remember being rather hostile to efficiency wage theory at the time, despite the fact that it was at the center of my dissertation. My main gripe was that it simply assumed that what employers wanted workers to do was productivity-increasing -- that maintenance of authority per se had no material significance (for instance on bargaining power) and that there was no room for legitimate disagreement between workers and managers on what actions would be in the collective interest of the firm. I have never been a "workerist", thinking that workers are always right in anything they want to do, but I've never been an "employerist" either. I think efficiency wage theory, at least in its shirking interpretation, actually takes that second position.

Sandwichman said...

Spencer (2002) and Baker and Weisbrot (1994) also critique the neo-Marxist variation of contested exchange of Gintis, Bowles et al.

JW Mason said...

I'm surprised you don't mention Pollin 1998, "The 'Reserve Army of Labor' and the 'Natural Rate of Unemployment': Can Marx, Kalecki, Friedman, and Wall Street All Be Wrong?" for the Marx-efficiency wage link. And Marglin, "What Do Bosses Do?" for the opposing argument Peter D. mentions, that the authority of the capital-owner in the workplace is not mostly about productive efficiency,

Sandwichman said...


My next post in the series should make it clear that my focus in these posts is primarily on the relationship between the efficiency wage hypothesis and the analysis of the hours of work.